Third-Party Funding in Cross-Border Commercial Dispute Resolution: Its Emergence, Legality, Ethical Concerns, Disclosure Norms, and Criticism

[1] 

Written by Kaanan Bhatia, the author is a law student currently pursuing LLB from Sushant University  

Introduction [2] 

In today’s global economy where businesses thrive by operating cross borders entering into complex commercial agreements, there has been a rapid increase in cross border disputes. Disputes involving cross jurisdictions are therefore complex, requiring an understanding of both domestic and international legal frameworks along with a lot of money and time. There has been a shift from International Litigation to International Commercial arbitration including Alternate Dispute Resolution (ADR) and it has emerged as one of most preferred legal avenues for resolution because it is faster, offers neutrality, party anonymity, and enforceability. However, Arbitration is expensive as it includes the administrative fees, the fees and expenses of the arbitrators, the legal fees of the parties, expert fees, the costs of the final hearing and other costs. As a result Third-Party Funding (TPF) has emerged as a major player in this scenario. TPF also known as litigation finance or litigation funding allows a party in dispute with limited resources to finance the costs of cross border arbitration by an external financier in exchange for a return from the final arbitral award if the dispute is decided in the party’s favor. This article seeks to first understand what TPF is, what is its nature and how it emerged followed by its legality across states and in India. It then finally moves on to discuss the ethical implications of TPF, disclosure norms and ends with its criticism.[3] 

II. Understanding TPF Model

A TPF model is a contractual agreement where a third party finances the legal proceedings in exchange for a return contingent upon the arbitral award. Typically, this return is structured as a percentage of the damages recovered, often between 20% and 40% or a multiple of the amount invested (commonly up to 3x the capital), depending on which yields a higher return.^[1] In case the arbitral tribunal renders an adverse award against the funded party, the funder’s investment is lost. All the terms regarding the percentage of the award to be returned, types of costs covered, terms of termination of agreement etc. are all mentioned and agreed upon in the agreement.

The process to raise a TPF includes 3 core phases; (1) Packaging the claim and approaching potential funders; (2) Concluding a term sheet and participating in a funder’s due diligence process; (3) Funder decides to invest and reaches an agreement on the terms of the funding agreement.

Burford Capital, Omni Bridgeway, Harbour Litigation Funding, and Litigation Capital Management are global leaders in litigation financing and managing legal risk. [4] They conduct rigorous due diligence and maintain diversified portfolios of funded disputes.

III. Emergence and Legality Across Jurisdictions

From the 15th Century, TPF had been considered illegal due to its perceived violation of the ancient common law doctrine of “champerty”. Champerty is a type of maintenance, which refers to any outside support given to a litigant. The key difference is that in champerty, the supporter expects to benefit if the case succeeds. If there is no reward involved, it is maintenance but not champerty. An agreement is considered “champertous” (and thus unlawful) when “third parties unrelated to a litigation provide material support to litigants in exchange for consideration contingent on the outcome of the litigation.” However, in recent years, the concept of TPF has been widely accepted across jurisdictions and even legally recognized in some states such as the UK, Singapore, Hong Kong etc. [5]  in arbitration. With regard to the arbitral process, Cannonway Consultants Ltd. v. Kenworth Engineering Ltd. held that doctrines of maintenance and champerty may still hold validity in traditional litigations, but cannot be said to apply to arbitrations.

In the UK a turning point came in 2005 when the Court of Appeals decision in Arkin v. Borchard Lines Ltd.^[2] confirmed the legality of TPF provided [6] they are fair and do not undermine the integrity of the proceedings. In this case, he English Court of Appeal established that funders could be held liable for adverse costs up to the amount they invested, creating a balanced system. In 2011, the Civil Justice Council along with the formation of Association of Litigation Funders published the Association of Litigation Funders (ALF) Code of Conduct that imposes capital adequacy, transparency, termination, control safeguards as well as funders to act reasonably. Although it is voluntary, courts regard ALF rules as reflective of best practice.

Singapore prohibited TPF until a 2017 legislative reform. Through the Civil Law (Amendment) Act 2017 and Civil Law (Third-Party Funding) Regulations 2017, permitted TPF international arbitration. It also abolished the tort of champerty and maintenance with respect to international arbitration and associated proceedings, including enforcement proceedings in Singapore Courts. This statutory reform was complemented by the Singapore International Arbitration Centre’s Practice Note on Third-Party Funding (2017), which operationalized TPF in SIAC-administered arbitrations by mandating disclosure of the existence of funding arrangements and the identity of the funder, and by addressing potential conflicts of interest, while remaining institution-specific in its applicability. In June 2021, the Civil Law (Third-Party Funding) (Amendment) Regulations 2021 extending the scope of TPF practices to domestic arbitration, proceedings commenced in front of the Singapore International Commercial Court (SICC) as well as related court and mediation proceedings. The legalisation was part of Singapore’s strategy to become a premier Asia-Pacific arbitration seat. [7] 

In Hong Kong, The Arbitration and Mediation Legislation (Third-Party Funding) (Amendment) Ordinance 2017 permitted TPF in international arbitration and mediation and issued the Code of Practice for TPF for Arbitration, setting out the practices, standards and obligations of third-party funders to carry on TPF in Hong Kong. It provides for mandatory disclosure of using a TPF as well as third party funders must maintain access to a minimum of HK$20m (US$2.6m) of capital.

In India, in Guruvayoor Devaswom Managing Committee v C.K. Rajan^[3], the Supreme Court acknowledged that third-party assistance is not illegal and permitted it on the ground of promoting justice. .The Supreme Court, through the case of A.K. Balaji v. Bar Council of India^[4], subsequently reaffirmed the validity of TPF but stated that attorney financing would be impermissible due to the potential violations of the provisions of BCI’s Standards of Professional Conduct and Etiquette.^[5] Therefore, it can be concluded that Indian laws do not prohibit TPF but there is no proper and adequate framework to it.

Since cross board commercial disputes span across states, the dispute sits at an intersection of the seat of arbitration, the place of enforcement, the law governing the arbitration agreement, the law governing the funding contract etc., it is important to understand the legal standing of TPF in a specific country. For example, in the case of Persona Digital Telephony Limited & Sigma Wireless Networks Limited v. The Minister for Public Enterprise, Ireland and the Attorney General^[6], the court declared third-party funding to be violative of the public policy of Ireland and therefore, decided to set aside the award rendered in that case.

IV.  Ethical & Jurisdictional Risks especially in Cross-Border Commercial Disputes Funding

1. Control of Proceedings, Party Anonymity and Appointment of Arbitrators

In cross-border disputes, as the stakes are usually multibillion-dollar claims, funders may impose contracts on their funding agreements whereby they retain undue influence over major issues such as settlement or the appointment of arbitrators. Such dynamics create a need for clearly defined ethical parameters that will prevent funders from co-opting the independence of legal representation.

2. Confidentiality and Privilege

A funder usually conducts due diligence before deciding to fund a claim.  During due diligence, divulging case-related confidential information may inadvertently lead to the loss of privilege and place sensitive information in the public domain by discovery. This creates a major issue especially in cross border commercial disputes as privilege rules differ across jurisdictions.

3. Conflict of Interests

The involvement of third-party funders in arbitration creates significant risks of conflict of interests, particularly in connection with arbitrator impartiality. The IBA Guidelines on Conflicts of Interest (2014) address the issue by categorizing funders as entities having a ‘direct economic interest’ under General Standard 6(b), thus necessitating the disclosure of arbitrators’ past relationships with the funders. Repeat appointments by the same funder, could create doubts about an arbitrator’s neutrality. In case of no mandatory disclosure, enforceability of the award under Article V of the New York Convention can be challenged. 

V. Disclosure Norms and Institutional Rules

The absence of mandatory global regulation has led arbitration institutions to address TPF through procedural rules.

The 2021 Arbitration Rules of the International Chamber of Commerce (ICC) introduced mandatory disclosure of third-party funding (TPF) arrangements to the ICC Secretariat, arbitral tribunal, and other parties, under Article 11(7) of the 2021 ICC Arbitration Rules, so that the tribunal can access conflict checks.

HKIAC Administered Arbitration Ordinance Rules, 2018, Article 44 provides that a funded party is required to disclose the existence of a funding agreement, the identity of the funder, and any subsequent changes to such information. This was done to promote fairness and so that tribunals may consider the funding arrangement when determining the costs of the arbitration.

Rule 24(l) of the SIAC Investment Arbitration Rules (2017) expressly gives the tribunal the power to order disclosure of the existence of the TPF arrangement and/or the identity of the third-party funder, and, where appropriate, details of the third-party funder’s interest in the outcome of the proceedings, and/or whether the third-party funder has agreed to be liable for adverse costs.

While a majority agree that these rules will lead to fair playing ground for the non-funded party and help in avoiding potential conflicts of interest between funders and arbitrators and preventing related challenges to arbitrators or arbitral awards., it raises concerns like privacy and confidentiality of the commercial agreement.

VI. Criticisms and Concerns

Firstly, it raises the problem of adverse costs: would the funders be liable to pay for costs? Some commentators and stakeholders have argued against holding external funders accountable for such costs. [8] As it could discourage funders from financing otherwise meritorious claims. Some simply argue that this type of funder's liability is a matter of contract between that funder and the funded party only, and therefore, there is no need to extend the jurisdiction of the tribunal beyond the funded party itself. On the other hand, a majority of stakeholders believe that a third-party funder should be liable for adverse costs for matters they have chosen to fund.[9]   It would be profound injustice, if a party who had been forced into an arbitration against its will only to find that, despite having properly and successfully defended its claims, it may be unable to recover its costs.

Secondly, it also raises concerns of commercialization of financial claims and treating them as financial assets and arbitration being reduced to a profit driven enterprise. As TPF becomes a profit driven enterprise, only high value disputes may attract funders thereby defeating the core value of TPF in the first place. Lastly, in cross board commercial disputes, corporations may go to forum shopping and picking places of arbitration in jurisdictions with predictable TPF laws and not neutrality.

VII. What India Needs: A Hybrid Regulatory Model

With the increasing popularity of TPF in some countries while no framework in India, global funders remain cautious. India needs to recognize TPF legislatively via amending the Arbitration and Conciliation Act, 1996 and should adopt a balanced model that include mandatory disclosure of funder identity, tribunal power to order security for costs, preserving claimant autonomy in settlement and protection of disclosed documents by litigation privilege lastly a grievance redress mechanism between funder and funded party. The Mumbai Centre for foreign Arbitration (MCIA) has had a significant number of international cases, with 13% in 2023 where either both or one party were international. India may adopt a UK or Singapore-style framework to attract investors while safeguarding the interests of both sides.

VIII. Conclusion

Third-party funding has evolved from an illegal practice to a commonly used instrument, getting even legal recognition in some countries as well. With cross border commercial disputes that usually involve claims of millions, TPF ensures that financially weaker parties are not compelled to give up on valid claims just because the other side has more resources.

However, the growth of TPF also raises concerns like funder influence over litigation strategy, risks to confidentiality, conflicts of interest in arbitrator appointments and as cross-border disputes span multiple jurisdictions, inconsistent national approaches make these issues even more complicated.

Institutional rules like those of ICC, SIAC and HKIAC have introduced disclosure obligations to promote transparency and prevent challenges to awards, but a globally uniform framework is still missing. Going forward, balanced regulation, capital requirements, disclosure of funders, and limits on funder control is essential. If responsibly regulated, TPF can support fairness and efficiency without compromising the integrity of international arbitration.

References

^[1] Jonas Von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, International Arbitration, Vol. 35, 30-31 (Kluwer Law International, 2016)

^[2] Arkin v. Borchard Lines Ltd., [2005] EWCA Civ 655

^[3] Guruvayoor Devaswom Managing Committee v C.K. Rajan (2003) 7 SCC 546.

^[4]  A.K. Balaji v. Bar Council of India (2018) 5 SCC 379

^[5] A.K. Balaji v. Bar Council of India, (2018) 5 SCC 379 (Bar Council of India’s Standards of Professional Conduct and Etiquette Rules, 1975, Part VI, Chapter II, read with the Advocate’s Act 1961, §49(1)(c) and the proviso thereto).

^[6] Persona Digital Telephony Limited & Sigma Wireless Networks Limited v. The Minister for Public Enterprise, Ireland and the Attorney General [2017] IESC 27.